The Cost of Covid Zero Keeps Rising

China's economy hasn't been in this bad a shape since the start of the pandemic

- Tom Hancock, Allen Wan

Virus outbreaks and a property slump are forcing Xi Jinping to put his revamp of China's economy on hold-and he faces mounting pressure to reverse last year's policies.

The omicron variant of the coronavirus slipped through China's border controls and is causing the largest outbreaks since Wuhan in 2020. About a quarter of China's population lives in cities that are now under some form of lockdown. Most of Shanghai's 25 million residents have been confined to their homes for more than a month. High-frequency indicators, such as city-to-city truck flows, suggest China's economy is contracting, and residents in multiple cities are struggling to find food and even dying from lack of medicines.

The economic outlook ranges from bad to very bad. In the most optimistic scenarios, the pace of new outbreaks slows as cities institute early and short lockdowns. In worse-case scenarios, China could face multiple Shanghais each month over the second and third quarters, which would raise the risk of a recession-something the country hasn't seen in the modern era.

With roadblocks across the country to prevent the spread of infections, activity at Chinese ports has plummeted, further straining global supply chains. Chinese financial and currency markets have sold off, and demand for imports of oil and other commodities is plunging.

The human suffering is raising doubts about the Chinese Communist Party's governing capacity. "There are a lot of unsatisfying decisions from the party," says Ada Yuan, a finance worker in Shanghai. "This is a big lesson for all of us after the country enjoyed a safe, stable environment without Covid-19."